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01/11/2000, by Mark McLaughlin CTA (Fellow) ATT TEP, Tax Articles - General
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Tolley's Practical Tax by Mark McLaughlin ATII TEP

This article reviews the Construction Industry Scheme, outlining the conditions for obtaining subcontractor's tax certificates, recent changes in the scheme, compliance procedures for contractors and subcontractors and a warning about the consequences of non-compliance.The new Construction Industry Scheme (CIS) came into effect from 1 August 1999 and its radical changes made it more difficult for subcontractors to obtain a tax certificate, and prevented their engagement by contractors (except under PAYE) without a valid registration card.

As a consequence of this tighter regime, the Revenue is understood to reject many applications for tax certificates. A recent unofficial estimate by an Inspector quoted that between 30% and 40% of applications were being rejected for non-compliance, although it is not known how closely these figures proximate to the national average.

This article examines the conditions for obtaining a tax certificate, and considers the reasons why applications for certificates are rejected on the grounds of non-compliance. All statutory references are to the Income and Corporation Taxes Act 1988, unless otherwise stated.

The day to day operation of the scheme, issue of vouchers, etc. is outside the scope of this article. The Revenue's leaflet IR 14/15(CIS) gives a clear guide to administration of the scheme and further information is on the Revenue's website.


The CIS broadly relates to payments under a contract between contractor and subcontractor for 'construction operations', which must be a contract for services (i.e. self-employment), and not a contract of employment (s 559(1)). Many recent articles have discussed status, and a consideration of this subject is therefore also outside the scope of this article.

A Subcontractor is defined as a party (e.g. a sole trader or limited company) to the contract with a contractor relating to 'construction operations', under which the subcontractor carries out those operations, or broadly arranges for others to carry out the work (s 560(1)).

A Contractor includes any person carrying on a business that includes 'construction operations', plus certain other bodies such as local authorities and Housing Corporations (s 560(2)).

A contractor in respect of one contract may simultaneously be a subcontractor in respect of another contract.

A contractor is generally required to deduct tax from all payments to subcontractors under a contract relating to 'construction operations', unless it is an employment contract, or the subcontractor produces a valid subcontractor's tax certificate. The CIS legislation contains a list of 'construction operations', and a list of excluded activities (see s 567 and Appendix B of Revenue leaflet IR 14/15(CIS)).

Where a contract contains both, the scheme will apply to all payments under the contract. A business that does not act as a contractor or subcontractor within the construction industry is excluded from the scheme if its average annual expenditure on construction operations does not exceed £1 million. Private householders are not within the CIS, and construction operations do not generally include work carried out abroad. There is also exemption for certain 'small payments' amounting to less than £1,000.

Cards and certificates

Before the contractor can make any payments under a contract for construction operations, the subcontractors must hold one of the following:

- A subcontractor's tax certificate (CIS5 or CIS6), confirming eligibility to receive gross payments; or
- A valid registration card (CIS4).

Where payments are made upon production of a registration card, the contractor must deduct tax equal to the 'relevant percentage' (s 559(4)). With effect from 6 April 2000, this percentage fell from the basic rate of income tax to 18%, in order to reduce potential repayment claims by taking into account personal allowances and the lower rate band.

Conditions for a tax certificate (CIS5 or CIS6)

An applicant for a tax certificate (an individual, a partner in a firm or a company) must satisfy three tests before the Revenue will issue the certificate (normally a CIS6);

- the business test;
- the compliance test; and
- the turnover test.

A new certificate issued on the basis of the six month turnover test (see below) is valid for one year, whereas an applicant who satisfies the three year or alternative turnover tests will be issued with a tax certificate valid for three years (Regulation 26 of the Income Tax (Subcontractors in the Construction Industry) Regulations SI 1993/743).

A company may qualify for a CIS5 (rather than a CIS6) certificate where certain conditions are satisfied, such as where its annual turnover is at least £3 million (£1 million from the end of November 2000). The Pre-Budget Statement on 8 November 2000 included proposals to allow partnerships to qualify for CIS5 certificates on the same basis as companies with effect from April 2001, and also to broaden the scope of electronic information exchange generally with the Revenue.

The business test

The applicant must be carrying on a business in the UK consisting of or including construction operations, or providing labour for such operations. The business must generally operate a bank account, keep proper records, and operate from proper premises and with proper equipment, stock and other facilities (s 562).

Certain companies that cannot operate with the usual subcontractor's tax certificate (CIS6) due to administrative difficulties (e.g. where verification of the certificate holder in person would be impractical) or commercial needs, must satisfy a 'business case' test if they wish to apply for a CIS5 construction tax certificate (Tax Bulletin April 1999, p 636). Examples include:

- A company generating a high volume of vouchers during the year (normally 300, but lower in certain cases);

- A company which can demonstrate that presenting its certificate would involve frequent or long journeys solely for that purpose;

- A company which can provide historical proof of the commercial need for a CIS5 certificate, where certain contractors have demanded a CIS5 before hiring them, such that the loss of a certificate would result in a substantial reduction in turnover; or

- A company that can prove that it has the potential opportunity to work for certain contractors which it believes would require a CIS5 certificate.

The compliance test

The applicant must have satisfied certain compliance conditions relating to the prompt payment of liabilities and filing of returns for a qualifying period of three years ending with the date of the application (see below).

The turnover test

A subcontractor cannot obtain a tax certificate unless his turnover satisfies the turnover test. For these purposes, 'turnover' means VAT-exclusive amounts received under contracts in respect of construction operations, as reduced by the cost of any materials and excluding any payments under employment contracts. Note that turnover relates to amounts actually received. However, if the three-year turnover tests below are based on financial accounts, an 'earnings basis' may be applied (see IR 40(CIS) Appendix 1). Any period of three consecutive years may be chosen in the four years to the application date, irrespective of accounting periods.

Individuals can choose between the standard test and the six month test. In addition to these tests, partnerships and companies can also choose the alternative test. The tests apply to individuals, partners in a business and certain participants in companies. In relation to companies, the turnover tests apply to the number of 'relevant persons' (broadly being directors, and shareholders in close companies, a director who is also a close company shareholder being counted only once). However, the turnover test does not need to be satisfied by a company if its shares are owned by another company or companies themselves holding valid tax certificates (s 565(2A)(b)).

(a) The standard test

The standard test is applied to three consecutive years in the four years prior to the date of application, as follows;

- The individual turnover threshold is £30,000. For partnerships and companies, this threshold applies to each 'relevant person' in the business. The multiple thresholds are based on the maximum number of participants at any point in each year of the test period. However, for applications made before 1 August 2001, the number of 'relevant persons' used as the multiplier for each year may be taken as the maximum number at any point in the final six months, if this is preferred (Extra Statutory Concession B52).

- The turnover in at least two of those years must be £30,000.

- The average turnover of the three consecutive years must be at least £27,000 (i.e. 90% of £30,000). This means that the minimum turnover for the three-year period is £81,000. The turnover for one of the three years may therefore be as low as £21,000, provided that turnover for the other two years is at least £30,000 each.

(b) The six month test

The six month test will normally be applied where the applicant for a tax certificate has not been in business for three years, or where average turnover is insufficient to satisfy the three year test.

The six-month test requires that the turnover in that period was at least £21,000 (i.e. 70% of £30,000) in a period of six consecutive months falling within the year prior to the date of application. The measure of turnover is the amount actually received in that period.

(c) The alternative test

The alternative test relates to partnerships and companies and is applied to three consecutive years in the four years prior to the date of application. It requires that:

- turnover thresholds are £200,000 per year, irrespective of the number of business partners or company participants;

- the turnover in at least two of those years must be at least £200,000; and

- the average turnover for each of the three consecutive years was at least £180,000 (i.e. 90% of £200,000), resulting in a minimum average turnover of £540,000 in total. Hence, turnover may be £140,000 for one of the three years, but at least £200,000 for the other two.

Compliance test failures

The remainder of this article will deal with the compliance test. Applicants for CIS5 or CIS6 tax certificates are generally required to have met all compliance obligations for a three year qualifying period (subject to 'minor and technical' failures, see below). If the applicant states that he was not subject to the obligations for all or part of the three year period due to being abroad, unemployed or a full-time student, certain evidence to that effect must be provided to the Revenue (SI 1993/743, paras 22-23B).

Applications may be rejected in the following instances:

Late completion of tax returns, etc.

The late submission of tax returns, accounts and other information required by the Revenue in the past can cause problems when subsequently applying for a tax certificate, or renewing an existing ones. Examples are as follows:

- Submission of tax vouchers. Following the introduction of the 'new' scheme from 1 August 1999, a shortage of CIS stationery often resulted in delays in the issue and submission of tax certificates by scheme participants. However, the Revenue now appears to be paying increasing attention to persistent delays. Adherence to the following deadlines is therefore important:

- Subcontractors holding a CIS6 certificate. Where payments are made to subcontractors holding a gross payment certificate (CIS6), the subcontractor must complete a "gross payment voucher" (CIS24). The subcontractor must provide the contractor with a voucher within 14 days following the end of the tax month. The contractor should submit the CIS24 vouchers received in each tax month to the Revenue within 14 days following the end of that month.

- Subcontractors holding a CIS5 certificate. When payments are made to subcontractors holding a CIS5 certificate, the contractor must complete a CIS23 voucher, showing payments made to the subcontractor company in each tax month. One part of the form must be sent to the Revenue within 14 days following the end of the tax month.

- Subcontractors holding a registration card (CIS4). The contractor must provide the subcontractor with a copy of a tax payment voucher (CIS25) within 14 days from the end of each tax month, in respect of all payments made in that tax month. A copy should also be sent to the Revenue within 14 days of the end of that tax month.

- End of year returns. The contractor must send to the Revenue an annual return (CIS36) of all payments to subcontractors in the year to 5 April, by the following 19 May.

- In T & C Hill (Haulage) (a firm) v Gleig (Insp of Taxes) ([2000] STC (SCD) 64, see TPT 2000, p80a), the compliance records of a firm and its four partners were considered to be poor. The firm had incurred penalties for the late submission of construction industry returns, and self-assessment returns for the partnership and the individual partners had also been submitted many months late. In addition, the firm paid certain tax arrears late, and the partner applying for a tax certificate had failed to pay arrears of tax, penalties and surcharges when they fell due. The Special Commissioner dismissed the firm's appeal against the Revenue's refusal to issue a certificate. The partners had failed to satisfy the conditions for individuals during the three year qualifying period (s 562), and the firm had failed to satisfy the conditions particular to it (s 564). The failures were not 'minor and technical', and could not be ignored.

Late payment of liabilities

The late payment of liabilities to the Revenue can jeopardise an application for a tax certificate. This includes the contractor's own business tax (and NICs, if applicable). It also includes PAYE and NIC as an employer and deductions from subcontractors.

The contractor must generally pay to the Revenue all amounts deductible from payments to subcontractors during the tax month, within 14 days of the end of that month. However, employers and contractors in the construction industry whose average net monthly remittances on account of deductions under PAYE or from payments to subcontractors are below £1,500 can choose to pay quarterly instead of monthly.

The Revenue is normally prepared to overlook short or infrequent delays. However, where liabilities to PAYE tax, NICs and subcontractor deductions are more than 14 days late more than three times in the tax year, this may be regarded as persistent failure. The writer is also aware of one case in which an application for a tax certificate was rejected because the taxpayer was less than 14 days late with payments, but on a persistent basis.

Other defaults

Examples of other defaults that may lead to the rejection of an application for a tax certificate under the compliance test include:

Failures to submit vouchers to subcontractors, contractors or the Revenue; and
Persistently incorrect completion of vouchers.

'Minor and technical' failures

'Minor and technical' failures to comply (e.g. a late tax return is submitted, where the resulting penalty is paid promptly and the delay did not postpone a significant amount of tax) may be excused if the Revenue is satisfied that the applicant would meet all future obligations (s 562(10)). The Revenue has produced lists indicating which failures would be regarded as 'minor and technical', and which would not (see Revenue leaflet IR 40 (CIS) at Appendix 2). Examples of 'minor and technical' failures include:

- Occasional transposition errors or incorrect additions on vouchers and returns;
- Late annual returns where there was a reasonable excuse for the delay;
- Late payment of PAYE and subcontractor deductions, but within seven days of the due date; and
- An 'occasional slight delay of a few days' in providing CIS25 vouchers to subcontractors, or any type of vouchers to the Revenue.

However, in addition to the potential reasons for rejecting applications for a tax certificate as indicated above (i.e. late filing of returns, late or non-payment of PAYE and subcontractor deductions and persistent voucher failures), the leaflet IR 40(CIS) provides additional examples of failures that would not be minor and technical:

- Abuse of the construction industry scheme, such as the misuse of documents;
- Failure to inspect the validity of tax certificates or registration cards; and
- Providing false or incorrect information in a certificate application.

In practice, applicants for a certificate who have failed the compliance test during the three year qualifying period may have remedied their failure prior to submitting the application, in an effort to qualify under the 'minor and technical' rule. It is perhaps interesting to note the Revenue Subcontractors Manual (covering the pre-CIS regime), which indicates that refusals based solely on past delays and failures should be restricted to cases where:

- the applicant's whereabouts have previously been unknown; or
- the extent of past delays and failures is such that, when weighed against the damage that would - be caused to the business from the refusal of the certificate, the Inspector considers that it would be inappropriate to overlook such failures (SC 351).


In practice, of the three tests to be satisfied when applying for a certificate, the turnover test is often the main cause for concern. However, the importance of the other tests cannot be understated. Even if the turnover and business tests are satisfied, a poor track record of compliance obligations may lead the Inland Revenue to reject the application on the grounds that there is no reason to expect compliance in the future. Applicants and their advisers should therefore take steps to ensure compliance on an ongoing basis.

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

Mark  is a consultant with The TACS Partnership LLP ( He is also editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional) 

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’. This content is available as part of a number of Bloomsbury Professional's online modules.

He is Editor and co-author of ‘HMRC Investigations Handbook‘ (Bloomsbury Professional).

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’, which provides free information and resources on UK taxes to taxpayers and professionals, and TaxationWeb’s sister site TaxBookShop.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb ( in 2002.

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